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While most of the world is witnessing an economic slowdown of unprecedented proportions, India’s life insurance companies witnessed an 11.36% growth in their collective income during the fiscal end of March 2020. This has also been accompanied by a deluge of different life insurance products that can sometimes make it difficult for customers to navigate through the maze of policies and covers. Additionally, the absence of a standardized product can lead to miss-selling, as well as insurers contesting claims on various grounds.

We saw this happen in the health insurance sector during the pandemic, where a number of insurers were rejecting claims on grounds of misrepresentation or non-disclosure. While a standardized product called Arogya Sanjeevani was soon launched for the health sector, the life insurance sector was still lacking a standardized product. However, come January 2021, all Indian life insurance companies are mandated to provide a standardized life insurance policy called Saral Jeevan Bima, prefixed with the name of the Indian insurance provider.

In a statement released by the IRDAI, officials were quoted stating “customers often cannot devote adequate time or energy to make informed choices,” and “products may not be available for the intended sum assured.” This is why the new Saral Jeevan Bima is set to have “simple” features as well as standard terms and conditions. The policy can be availed of by anyone between the age of 18-65 with a maximum age of 70. Minimum and maximum terms are 5 and 40 years respectively, while the life insurance cover is between Rs. 5-25 lakh.

With the new guidelines in place, anyone who avails of this policy will receive ten times the annualized premium in case of the death of the policyholder, as well as the assured amount and 105% of all premiums paid as of the date of death. Additionally, single premium policy holders will receive 125% of all single premiums in addition to the assured amount. Last but not least, this policy will have no exclusions except a suicide clause. In conclusion, it’s about time the life insurance sector received some standardization, and such measures only serve to benefit consumers.

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Greetings,
 
We hope you found our previous post on the Pradhan Mantri Vaya Vandana Yojana both useful and informative. If you haven’t had a chance to read it yet, we’ve put it here so you don’t miss out.

While the Mesopotamian shekel, the oldest known form of currency, was first used to trade over 5,000 years ago, it wasn’t till the 1920s that Dr. Solomon S Huebner managed to calculate what a person’s life is worth. Yes, the process of buying and selling human beings probably predates our earliest historical records, but what we’re talking about here is human life value in the context of insurance coverage. Human Life Value or HLV is an economic theory to put a monetary value on a human’s life in order to select appropriate life coverage.

This is quite simply the process of calculating the total economic loss caused to a person’s next of kin, which comes in addition to the obvious mental and emotional trauma that comes with a death in the family. While you can’t put a price tag on the latter and only time can heal such wounds, it’s the economic loss that we are interested in putting a price tag on. It may sound disconcerting at first to have to assign a monetary value to a person’s life, but the reality is that without such preparedness, grief would undoubtedly be accompanied by financial troubles as well.
This is probably why Dr. Solomon S Huebner talked extensively about developing a sense of responsibility among the general public and in particular, doing away with the myth that a person’s responsibility to his family is limited to his time in this world. Additionally, Dr. Huebner looked at any such shirking of responsibilities as a “crime of not insuring,” and even encouraged a “finger of scorn” to be pointed at anyone who was not interested in securing the future for their dependents.

Humans are social beings who depend on each other for strength and support. When you talk about Human Life Value, it’s basically the current, future, and potential financial support that you create for those who depend on you. This is done by taking into account a number of factors like your present age, what age you plan to retire at, annual income, employment benefits, and more. When you calculate all the variables and finally boil it down to one number, what you get is the final amount required to ensure that your death won’t affect the people you love financially.

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Now ideally, you don’t want your dependents to have to depend on your life insurance coverage, but rather on the interest which is generated from the deposit of the insured amount. So while a simple way to calculate Human Life Value is obviously to calculate your monthly income from today till the time you retire, we’re going to look at four different levels of life insurance coverage.
 
1.Minimum level: The minimum level is where you cover yourself for up to 100 times of your monthly net income. For example, a man with a monthly income of Rs. 100,000 insures himself for 1 crore, which is 100 times his monthly income. This means his dependent can put this in a savings account at a 6% interest rate to earn Rs. 50,000 a month, which is 50% of his monthly income.

2.Adjustable level: In the Adjustable level you cover yourself for 150 times your monthly net income so the same 6% return on deposit would generate 75% of your monthly income.

3.Comfort level: The comfort level is where you get covered for 200 times of your net monthly income so, in case of any eventuality, your spouse will get the same amount as you were contributing to the family.

4.Considering future inflation: It is always wise to take into account future inflation and in such a situation it is recommended to cover yourself for 300 times of your monthly income so that your family receives 150% of your monthly income in the event of an unfortunate circumstance.

 The interest rate, inflation and coverage differ from person to person & country to country. To find out the exact values kindly contact us.

 In conclusion, death is hard to talk about, a lot harder to deal with, and most importantly, filled with uncertainty as no one knows when they’re going to die. That being said, the knowledge that you do know exactly how much your life is worth to your family and that you can prepare to have those needs met accordingly, is both comforting and reassuring.

 If you enjoyed reading this post, please leave a comment or a suggestion on what financial topic you would like to read about next.

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General

1. First digital Budget in the history of India

2. Vehicle Scrapping Policy. Vehicle Fitness Test after 20 years in case of Personal vehicle and 15 years in case of commercial vehicles

3. 64,180 crores allocated for New Health Schemes

4. 35,000 crores allocated for Covid Vaccine

5. 7 Mega Textile Investment parks will be launched in 3 years

6. 5.54 lakh crore provided for Capital Expenditure

7. 1.18 lakh crore for Ministry of Roads

8. 1.10 lakh crore allocated to Railways

9. Proposal to amend Insurance Act. Proposal to increase FDI from 49% to 74 %.

10. Deposit Insurance cover (DICGC Act 1961 to be amended). Easy and time bound access of deposits to help depositors of stress banks.

11. Proposal to revive definition of ‘Small Companies’ under Companies Act 2013. Capital  less than 2 Cr. and Turnover Less than 20 Cr.

12. Disinvestment: IPO of LIC, Announced Disinvestment of Companies will be completed in FY 2021-22

Direct and Indirect tax

1. Senior Citizens: Reduced Compliance burden. 75 years and above. Proposal not to file ITR if only pension income and interest income.

2. Reduction in time for IT Proceedings: Reopening of Assessments period reduced from 6 years to 3 years except in cases of serious tax evasion cases

3. Proposal to constitute ‘Dispute Resolution Committee’. (Taxable income 50 lakhs and disputed income 10 lakh).

4. National Faceless Income Tax Appellate Tribunal Centre

5. Relaxations to NRI: Propose to notify rules for removing hardship for double taxation.

6. Tax Audit Limit: Proposal of tax audit increased from 5 Cr. to 10 cr. (Only for 95%  digitized payments business)

7. Propose to provide relief on advance tax liability on dividend income.

8. Propose to include tax holidays for Aircraft leasing companies

9. Prefiling of returns (Salary, Tax payments, TDS etc.)  Details of Capital gains from listed Securities, dividend income, etc. will be prefilled

10. Small Charitable Trusts. Increased from 1 crore to 5 crores (Compliance limit)

11. Late deposit of employee’s contribution by employer will not be allowed as deduction

12. Incentive to startup: Tax holiday exemption for one more year

13. Duties reduced on various textile, chemicals and other products

14. Gold and Silver (BCD reduced)

15. Agriculture Products: Custom duty increased on cottons, silks, alcohol etc.

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What a lot of people don’t realize, is that there’s a lot more to mutual funds than the fact that they’re subject to market risk, and offer documents should be read carefully before investing.

While people who have a lot of money to invest can afford professional “money-managers” and diversified portfolios, mutual funds give the common man access to such professional money managing services. Think of it as a common fund or pool of money, where the public contributes and the collective amount is then invested by experts, according to the investment objective of the fund.

The different types of mutual funds are:
Equity funds - funds that invest in stocks
Debt funds - funds that invest in fixed income instruments
Money market funds - funds that invest in short-term money market instruments
Hybrid funds - funds that divide investments between equity and debt to create a balanced or diversified portfolio.

In this post, we’re going to take a closer look at Equity funds, in particular, as well as some variations of them. Equity Funds invest in stocks of companies and may further be classified in terms of the market capitalization of the target investment objectives.

These are:
Large-cap funds: These are open-ended equity funds that invest at least 80% of their assets in large-cap (1-100)stocks meaning big, established companies with excellent track record. These stocks are dependable and risk is comparatively less than mid-cap and small-cap.

Mid-cap funds: These are open-ended equity funds that invest around 65% of their assets in equity and equity-related instruments of mid-cap companies(101-250) or companies that are growing and progressing well but still no big enough to be classified as large-cap. The fact that many of these companies may soon progress to large-cap makes this segment quite lucrative for investors.

Small-cap funds: These are open-ended equity funds that invest around 65% of their assets in small-cap stocks(more than 251st) whic refers smaller companies. While these funds generally have an immense potential for growth, with a higher level of risk, of course. These funds are generally for investors with a high risk profile or to balance out a portfolio.

Microcap funds: These are open-ended equity funds which invest around 65% of there assets in publicly-traded companies that have a market capitalization less than small-cap companies. Like small-cap stock, micro-cap carries an even higher risk with explosive growth prospects.

All equity Funds can be classified into Active and Passive, where the fund is run by a team of experts and a passive fund mirrors a popular market index like Sensex, BSE.

The main advantage of investing in a mutual fund is that each investor, no matter how small the investment, gets access to professional money management service. Additionally, it would be quite difficult for an individual investor to build a portfolio that’s as diversified and spread out as a mutual fund on their own.

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People often associate risk with luck, and while that may be true to an extent, the major difference is that unlike luck, risk can be measured. Now before we get into the ratios that help us measure how much risk is attached to a particular mutual fund, an important concept to understand is volatility. Volatility is basically the measurement of how erratic a particular fund is, so if a particular fund is highly volatile, what this means is it has a tendency to either rise or fall sharply in a relatively short period of time. This is why volatile funds are generally considered high risk.

Alpha

With an Alpha ratio, instead of comparing a fund's performance to its own average like some other ratios, we’re comparing its risk-adjusted return with a benchmark (example Sensex, Nifty). This is why an alpha ratio can be either negative or positive, with a negative ratio indicating a fund that is underperforming in comparison with its benchmark. For example, an alpha ratio of +3 indicates a fund that outperformed its benchmark by 3%, while -3 would indicate a shortfall of 3%.

Beta

Also called the beta coefficient, this one is a little different than the others since the value is going to be a fraction above 1 or a fraction below 1. What it is, is a measurement of the fund’s tendency to shadow the market as a whole, or to shadow a particular benchmark or index. So a value below one, like 0.7 for example, would indicate a fund that shadows the market up to 70%, so for every 1% change in the market, up or down, you can expect a 0.7% change in the fund. Similarly, a value above one, like 1.3, would indicate a fund that’s 30% more volatile.

Standard Deviation

This one is quite simply what we just explained with the definition of volatility, and is the measurement of how volatile a particular fund is, in relation to its own average. To elaborate, if a particular fund has an average return of 20% but also has a standard deviation of 10%, this means it could go 10% to 30%, or down 10%.

R-Squared

Since the Beta can be calculated against the market as a whole or any other benchmark, this can be misleading if the benchmark in question isn’t appropriate. This is why we have the R-Squared ratio which indicates the “relationship-level” between the fund and the index that’s being used to measure the Beta. R-Squared ratios go from 0-100, and while a 70 - 100 indicates an appropriate benchmark is being used and the Beta ratio can be trusted, anything below implies the Beta ratio is not a useful indicator.

Sharpe’s Ratio

Last, but definitely not least on our list, is the ratio developed by renowned economist and Nobel laureate William Sharpe, and is probably the most interesting of them all. Suppose a particular fund is performing really well and you are feeling really good about increasing your investment. What Sharpe’s ratio will tell you is whether the previous returns were due to smart choices by the fund manager or just higher risks being taken. This is why going by just one ratio can often be misleading as there are always a number of factors that need to be taken into consideration.

In conclusion, while everyone always talks about mutual funds being subject to market risk, no one tells you that market risk is tangible, can be measured, analyzed, balanced, and most importantly, accounted for.

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When you think about mutual funds, the first thing that generally comes to mind is equity and the stock market. What a lot of people don’t realize, is that’s only half the story. For the more cautious investors, there are mutual funds that invest exclusively in fixed-income securities, that unlike equity, carry a lot less risk and deliver much better returns when compared with general banking products.

Mutual funds that invest in fixed-income securities are called debt funds and investments include corporate bonds, government securities, commercial paper (CP), certificates of deposit (CD), treasury bonds, and money-market instruments. Money-market instruments are funds that finance businesses for short periods of time in order to create a cash buffer to negate the gaps in payment cycles. These are great if you’re looking for a quick turnaround as investment options range from overnight to a year.

So the obvious question here would be “why doesn’t everyone invest in debt funds instead of putting their money in the bank?” The answer, debt instruments aren’t generally available for purchase because the minimum investment requirements put them out of reach of most retail investors. This is where mutual funds come in and make these fixed-security investments available to everyone who has a little cash to spare. Additionally, since these funds are all tied to some sort of corporate debt, they appreciate when interest rates fall.

Now there are about a dozen different types of debt funds and to keep it sweet and simple, we’re going to keep the definitions as short as possible.
First, we have them categorized by maturity period:

1. Liquid funds: Pretty self-explanatory, the main factors here are minimum investment period is 1 day, maximum period 91 days, and funds are invested in debt instruments that can be liquidated at any time. This is why liquid debt funds don’t have any lock-in period and redemption is typically processed in 24 business hours. Investments include different types of debt securities like treasury bills, certificates of deposit, commercial paper, and more.
2. Ultra-short-term funds: These have a slightly longer “wait-time” than liquid funds, come with a maturity period of anywhere from 3 to 6 months, and investments are exclusively in money-market and debt securities.
3. Low duration funds: Investments are in money-market and debt instruments while the maturity period is 6 to 12 months.
4. Short duration funds: Investments are in corporate and government bonds while duration is 1 to 3 years.
5. Medium duration funds: Investments are in corporate and government bonds while duration is 3 to 4 years.
We also have them categorized by investment portfolio:
6. Money-market funds: Investments are predominantly in money-market instruments and maturity is up to 1 year.
7. Corporate bond funds: Investments are predominantly in corporate bonds with a high rating (AA+ and above) and maturity is up to 1 year.
8. Credit risk funds: Investments are predominantly in corporate bonds with a rating of AA and below, and maturity is up to 1 year.
9. Banking and PSU fund: 80% investment in banks, public sector undertakings, and public sector financial institutions, the maturity period is 1 to 10 years.
10. GILT Funds: 80% invested exclusively in government securities, maturity period 3 to 5 years.
11. Floating rate funds: Since rising interest rates in the economy adversely affect banking and PSU funds, floating-rate funds offer more agility by investing at least 80% in fixed-income securities with variable interest rates. This means while the maturity is up to 7 years, the interest typically gets adjusted every 30-90 days.
12. Fixed maturity funds: Investments in high-rated debt securities and corporate bonds, investment is only available during a new fund offer, and maturity is predetermined.
In conclusion, if you don’t want to risk the stock market to get better returns on your money, debt funds are the next best thing. Not only do they come with quick turnaround times, they also minimize risk by investing in fixed-income securities.

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